Transactions recorded in the journal do not automatically produce any results. Similar transactions are to be recorded under separate headings in chronological order, and they are to be divided according to their type and nature. So that the accounting period’s results are accurate.

Advantages of Accounts

The following are the top 17 advantages of accounts:

1.Permanent Record:

Accounts are important for permanently recording transactions. Through the use of the accounts, transactions are permanently recorded in short form.

2. Determining Cash Balance:

The amount of cash is always known only by keeping accurate accounts. Moreover, misappropriation of cash funds can be prevented by keeping cash accounts.

3. Determining the Number of Debtors or Receivables and Creditors or Accounts Payable:

By keeping the accounts properly, the total debtors or receivables of the business and the number of creditors or accounts payable can be known.

It gives information about the financial status and results of different individuals or organizations.

4. Justify the Mathematical Accuracy of the Accounts:

The mathematical accuracy of the account can be verified by making a trial balance with the debit and credit balances of the ledger.

As a result, it is possible to accurately determine the financial results of the transaction.

5. Documentary Evidence:

Every transaction of the business is permanently written in the book of accounts. And if there is any confusion between different people and parties in the business, it acts as documentary evidence.

6. Comparative Analysis of Accounts:

Accurate maintenance of accounts allows you to compare the previous year’s financial situation to the current year’s financial situation, which aids in the formulation of future plans and budgets.

7. Classification:

It is necessary to classify the accounts of the business organization for the purpose of proper preservation.

This is because classification is done on the basis of homogeneity in order to achieve the goals of an organization.

8. Determining Profit & Loss:

Any person or organization would like to know the profit and loss of his business from time to time.

So if the account is kept properly, the actual profit and loss of the business can be determined.

9. Cost Control:

Necessary and unnecessary expenses for an individual or organization can be easily identified by keeping proper accounts.

It helps to eliminate unnecessary expenses. So accounting helps in controlling costs.

10. Determining the Financial Condition:

The first and foremost task of an individual or organization is to be aware of the financial condition of the business.

So every business organization keeps proper accounts so that it can know about the financial condition of the business at the end of the year or at any time.

11. Helping in Tax Assessment:

Tax calculation is easier if the accounts are kept properly. In addition, the importance of keeping accounts is essential in determining income tax, sales tax, value-added tax, production tax, etc.

12. Assistance in Preparation of Final Accounts:

Trial Balances, worksheets, income statements, and balance sheets are prepared with the balances of accounts.

And by preparing the final account, the financial results and financial condition of the organization can be known accurately.

13. Prevention of Fraud:

Debit-credit analysis is performed as soon as the transaction occurs, and the accounts are recorded in chronological order so that fraud can be easily prevented.

14. Benefits for Lenders:

Lenders get various benefits through accounts. The amount of loan and interest is easily known as the lender’s loan account and interest account are kept separately.

15. Benefits for Owners:

Through account keeping, the owner’s capital and withdrawal accounts are kept separate. As a result, determining how much money the owner has raised and invested as capital during the current account is easy.

16. Benefits for the Investors:

Different individuals and organizations invest the money of the respective organization. The interest they get on that investment is shown through individual accounts.

As a result, investors can easily know their interest and principal amount.

17. Assistance in Management:

The business’s future planning, policymaking, and other activities depend heavily on maintained accounts. This makes management activities easier to manage.

At the end of the above discussion, it can be said that the necessary information about the income-expenditure, debts, property, and ownership of any person or organization as well as the results of all their activities and financial status can be known through accounts.

So we can say that the advantages to accounts are immense.

You can also read:

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• Short Questions and Answers-Accounts.
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What is Balancing of Account?

The balancing of the account is the process of balancing the debit and the credit side of the account at a given time.

That is if the sum of the debit and the credit side of an account is unbalanced, the difference between the small amounts excluding the larger amount is called the balance of the account.

For example, let me say that the sum of the debit side of Mr. Peter’s account is $1000. The sum of the credit side of his account, on the other hand, is $400. The balance of Peter’s account is ($1000-$400) = $600. This $600 is shown on the lower side, i.e. towards the credit side of the account.  

In other words, the difference between the amounts on both sides of the account is called the balance of the account.  

There are two types of balance of accounts. Like the debit balance and the credit balance.

You can also read  Accrual vs Cash Basis Accounting

Debit Balance

If the sum of the debit side of an account is greater than the sum of the credit side, this difference is called a debit balance.  

Suppose, the sum of the debit side of Mr. Jonson’s account is $1000. And the sum on the credit side is $ 600. So, the debit balance of Mr. Jonson’s account is (1000-600) = $400. This debit balance will have to be shown as Balance c/d on the lower side of the account i.e. credit side.

Credit Balance

If the sum of the credit side of an account is greater than the sum of the debit side of an account, this difference is called credit balance.  

Suppose, the sum of the credit side of Mr. Jonson’s account is $500. And the sum of the credit side is $200. So the credit balance of his account is (500 – 200) = $300. This credit balance will have to be shown as Balance c/d on the lower side of the account i.e. debit side.    

Procedure for Determining the Balance of the Account

The following procedure may be followed to determine the balance of the account.  

The balance of the account is calculated by calculating the difference between the amounts of both sides of the account.

The Balance c/d has to write down to equal to both sides of the account, where the amount is less.

If the sum of the two sides is equal, two parallel lines must be submerged under the total of the two sides to close the account.

The date on which the Balance c/d was written on the date on which the account was closed was due to be reversed on the date on which the account was opened.  

Formula for Determining the Balance of the Account

 Debit Balance = Total amount of the debit side –Total amount of the credit side.  

Credit Balance = Total amount of the credit side –Total amount of the debit side.  

Zero Balance = Total amount of the debit side = Total amount of the credit side.  

From the above discussion, it can be said that, in the case of accounting, the balance between the debit and the credit side of the account is determined by the balancing of the account. As a result, the actual financial situation of the organization is known.    

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The post It’s All About (The) Balancing Of Account [Notes with PDF] appeared first on Everything about Accounting.

What is Accounting Records?

Accounting records are the records of the financial transactions and the current financial position of the firm.

Accounting records are required for tax purposes, legitimate transparency, and proper financial oversight. These are the key sources of information and evidence used to prepare, verify, and/or audit financial statements. 

They also include documentation on the Proof of Asset Ownership for Liabilities and proof of monetary and non-monetary transactions.

Benefits of keeping Accounting Records

It is very important that business owners have a habit of recording their business transactions every day. It will help to make informed, efficient, and accurate decisions at any time.

Proper accounting requires an up-to-date accounting system that records big business transactions as they happen and maintains important receipts or bills to support all expenses on behalf of the company.

It cannot overemphasize the benefits of keeping accounting records and some are:

Saves taxes

Well-kept accounting records serve as a legacy of deductible credits and expenditures for an individual.

It is only by keeping correct records of business expenses that owners are able to prove the various expenses incurred during the conduct of business operations. They’re not forced to rely on memory by doing this.

This means that they pay only what is due, no more or less, as their records remind them of all the expenses that they are entitled to claim against their income.

Test your accounting skills with our basic accounting quiz- 01(Mixed)

Acts as income and expenses backup

Tax auditors may be compelled to make decisions on the basis of their “best judgment” of the value, the profits and expenditures could be based on their company size, position, or business type without accounting records.

Moreover, industry standards could be used as a guide in the business audit without the correct records.

Reduce the audit period

When a business is selected for an audit, the owner of the business must provide backups in the info field on the income tax return.

The auditor can then review the records provided, and make a timely decision regarding the accuracy of those records, once the business operator has produced the right records. Consequently, the auditor spends less time in the enterprise.

Compiles with the law

One of the main advantages of keeping an accounting record in compliance with the law. 

By simply organizing businesses, not only the above benefits but also staying within the law.

Shows the financial position of the business

With the right records, the business owner can identify areas for expansion or improvement. 

Proper records also help the owner of the business to secure financing for the business.

In addition, proper analysis of records can help to make a strategic decision to change the focus of the business.

Avoid any interest and penalties

Proper accounting records help business owners avoid interest and penalties because they make it easier for them to pay the right amount of tax at the right time.

Penalties are in place forever (if any), but proper records can help business owners avoid them. 

By the time the deadline has come, everything should be ready for filing in good order.

I hope, you have understood what is accounting records? and how can we take advantage of keeping accounting records? if there is any confusion in mind or if you like it don’t forget to comment.

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The post Take Advantage Of Accounting Records – Read These Tips [With PDF] appeared first on Everything about Accounting.

The basis for recording the transaction

Due to differences in the basis of accounting, homogeneous events are recorded in one organization but may not be recorded in another organization.

There are two types of accounting

1. Accrual Basis Accounting     
2. Cash Basis Accounting

What is Accrual Basis Accounting?

The directive of accrual basis accounting is that the transactions that change the financial position of the Institutions are recorded only when events take place.

On this basis, it is recognized as income only when income is earned (even if cash is not received). Again, it is recognized as an expenditure only when the expenditure is incurred (even if the expenditure is not paid in cash). 

That is, the outstanding income and expenditure are also recognized as income and expenditure. Large companies perform accounting on an accrual basis.

The accrual basis accounting is done on the basis of generally accepted accounting principles established on a modern accounting basis.

Accrued and prepaid income and expenses are recorded in an accounting book according to accrual basis accounting.

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What is Cash Basis Accounting?

The directive of cash-basis accounting is that income is recorded only when cash payments are received and expenses are recorded only when cash payments are paid.

On this basis, income is earned but it is not recorded if the cash is not received and the expenditure is incurred but it is not recorded if the cash is not paid for expenditure. In other cases, cash receipts, and cash payments are recorded only in the event of occurrence.

Some small companies and government institutions perform accounting on a cash basis. The cash basis accounting is inconsistent with the generally accepted accounting principles (GAAP). Tax accounting is prepared based on a cash basis accounting.

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Difference between Accrual and Cash Basis Accounting

The comparative difference between accrual and cash basis accounting is stated below

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What is an Account?

An account is a ledger record that summarizes all of the transactions that have occurred with a specific person or object.

Everyone wants to know the financial condition and the financial results of the organization at a certain time. In order to know these financial results, all transactions must be recorded in a disciplined and proper manner.

The summary and a brief statement of these transactions are called the Account.

The English word “Account” originated from the old French word “Accounter,” which means to count or calculate. In a hierarchical sense, the account is the statement of deposits and expenditure.

According to the accounting language, the account is a brief statement of homogeneous transactions.

For example, Furniture purchased as cash $8,000. Here are two accounts that are involved.  Furniture Account and Cash Account.

Purchase A/c, Sales A/c, Capital A/c, Debtors A/c, Creditors A/c, Salary A/c, Land A/c, etc. are the example of accounts.

6 Important Features or Characteristics of Account

The 6 important features or characteristics of the account are as follows:

1. Each account has a specific heading. For example, Salary a/c, Debtor a/c, Sales a/c, Creditor a/c.
2. Each account has a specific format.
3. Transactions occurring in the organization are classified according to their nature and recorded under a specific heading.
4. There is a reflection of the dual entity.
5. Each account has a reference to when a transaction takes place.
6. The account balance must be calculated immediately after each transaction is recorded in a modern format.

9 Important Purposes or Objectives of Account

The 9 important purposes or objectives of the account are as follows:

1. keep track of transactions on a long-term basis.
2. Assist to determine the profitability of the business.
3. Help to prevent fraud and falsity in the organization.
4. Help to reduce costs of organizations by reducing unnecessary expenses.
5. The account book serves as a proof document to ensure that each transaction is clear and properly recorded.
6. Help accurately assess the financial results of the organization.
7. Assist in the preparation of financial statements of the organization.
8. Help in determining the amount of income, expenses, debt, and assets of the organization.
9. Assist management in planning for the organization.

Classification of Account

There are two methods of classification of account:

1. Traditional Method
2. Modern Method

1.Traditional Method:

The table below shows the classification of accounts in the traditional method.

i. Personal Accounts:

Personal accounts are accounts that are associated with individuals or organizations. For example, Bank account, Harry account, Stephen College account, etc.

Personal accounts can be divided into two categories.

1. Debtor Accounts
2. Creditor Accounts

1.Debtor Accounts

Debtor accounts are personal accounts from which the company or accounting unit is entitled to collect credit.

For example, if the organization sells goods on credit to William, William is the organization’s debtor.

2. Creditor Accounts:

Creditor accounts are personal accounts to whom money must be paid by the organization or accounting unit.

For example, if the organization purchased goods from Allen on credit, Allen is the organization’s creditor.

ii. Impersonal Accounts:

Impersonal accounts are any accounts that aren’t associated with a particular person or business.

There are two types of impersonal accounts:

1. Real or Property Accounts and
2. Nominal Account or Income-Expenditure Account

1.Real or Property Account:

An account relating to the property is called a real or property account. For Example, Building A/c, Furniture A/c, Machinery A/c, etc.

2. Nominal Account

A nominal account refers to the business’s profit-loss account, income-expenditure account, etc.

For example, wage account, salary account, advertising account, etc.

Nominal accounts have no real existence, they are nominal. In modern times these are known as ownership accounts because they cause a decrease or increase in ownership.

There are two types of nominal accounts.

i. Revenue-Related Account:

A revenue-related account refers to the transaction from which the organization’s revenue grows.

For example, Sales Revenue a/c, Commission received a/c, interest received a/c, etc.

ii. Expenditure-Related Account:

An expenditure-related account refers to the transaction from which the organization’s expenditure grows.

For example, salary a/c, Rent a/c, wages a/c, etc.

Personal accounts are divided into three categories by nature:

1. Nominal Personal Accounts
2. Legal or Artificial Personal accounts
3. Representative Personal Accounts

1.Normal Personal Accounts:

The normal personal account means the account of a person made of normal blood and flesh.

For example, Alisha account, Matt account, etc.

2. Legal or Artificial Personal Accounts:

The person or organization created by law is called an artificial personal account.

For example, XYZ Limited, Citi bank, etc.

3. Representative Personal Accounts:

Accounts representing the name of a person or organization are called representative personal accounts.

For example, advance salary account, arrears of wages account, etc.

2. Modern or Accounting Equation Method

According to the Accounting Equation method, accounts can be classified as follows:

1. Asset Account: Land A/c, Furniture A/c, Building A/c, Investment A/c, Debtors A/c
2. Liability Account: Bank overdraft A/c, Creditors A/c, Note Payable A/c
3. Capital Account: Owner’s Capital A/c
4. Revenue Account: Sales A/c, Service Revenue A/c, Interest Income A/c
5. Expense Account: Salary A/c, Rent A/c, Interest A/c
6. Drawings Account:   Owner’s Drawing A/c

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Format of Accounts

The specific format that is used to maintain a good and proper account is called the Account format.

There are usually two types of formats.

1. T-Format or Common Format

Features of “T Format”:

1. Each account will have a title.
2. There are two parts: debit and credit.
3. There will be a total of 4 columns, including four in the Debit section and four in the Credit section.
4. The balance is calculated at the end of the period.
5. The account will have a code number. 

2. Modern Format or Running Format

Features of Modern Format:

1. Each account will have a title.
2. The number of columns will be Five (5)
3. The account balance is to be extracted immediately after each transaction is recorded.
4. Debit and credit amount columns stand side by side.
5. Each account has a code number.

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